Day 64: Inflation - Part 1

What is this thing called inflation?

Inflation simply refers to the continuous increase of prices in an economy. So - two points are important to note: if prices go up and then remain stable for a while, we don't refer to it as inflation, as inflation only applies to a continuous increase in prices. Secondly - if the price of petrol keeps rising, but all other prices remain somewhat stable, we're also not dealing with inflation, because in the case of inflation all prices keep rising.

Measuring Inflation

One of the most common ways to measure inflation is by making use of the consumer price index (CPI). Remember from the previous blogs, that CPI reflects the cost of a representative basket of goods and services. To obtain the inflation rate, we calculate the percentage change int he CPI from one period to the next. Meaning - if the inflation rate is 7.5%, it means that the cost of purchasing a representative basket of goods and services increased by 7.5% from one year to the next.

Effects of Inflation

One of the major economic effects of inflation is that what a country is trying to sell to other countries, eg. exporting, will be more expensive for foreign countries to buy. Therefore, an economy loses its competitive edge on the international market and the performance of the economy generally goes down - in turn, affecting everyone operating within it. Another more obvious effect, of course, is that the cost of living increases, people become fearful and agitated and start throwing accusations around about who's to blame for the inflation. Some, however, claim that the greatest danger about inflation is that it will cause more inflation. When inflation occurs, people expect prices to keep on rising - therefore, they will quickly go and buy as much as they can now, before prices get even higher. Because more products are suddenly demanded, prices go up and thus, the inflation rate often increases, even pushing the economy in some cases towards 'hyperinflation'.

The Causes of Inflation

There are two main causes of inflation: demand-pull inflation and cost-push inflation.

Demand-pull inflation

The term speaks for itself - demand-pull inflation occurs when increased aggregate demand for goods and services pushes prices up. Aggregate demand can go up in any of the following cases, or combination of cases:
- when consumption spending increases
- when firms increase their investment spending
- when governments increase their spending
- when export earnings increase
In other words - whenever the amount of money in circulation increases in an economy, the prices will go up. Check: the more money is available in an economy, the less it is worth, which is reflected in higher prices - because with the same amount of money in your pocket, you can now purchase less stuff, which means that your money is not worth as much as it used to anymore.

Cost-push inflation

Cost-push inflation occurs whenever an increase in production costs is responsible for pushing up the price level. In other words:
- when wages and salaries increase
- when the cost of imported capital and imported goods increases
- when profit margins increase
- when productivity decreases
- when natural disasters occur, such as droughts or floods
In the case of cost-push inflation, we don't only have to deal with an increase in prices, but we also have to deal with a decrease in income and productivity. This is referred to as 'stagflation'.

Day 62: The Consumer Price Index - Part 2

I forgive myself that I have accepted and allow myself to pre-occupy myself with research, study and investigation concerning ‘the consumer’ and thus I forgive myself that I have accepted and allowed myself to only care about a segment of the population as ‘the consumers’ as ‘those who have money’, and will go about my business as if everyone is a consumer, publishing information as if it ‘concerns everyone’ – while in fact it only concerns a select few as those with money and purchasing power within this world

I forgive myself that I have accepted and allowed myself to have created a separate reality, as the ‘consumer reality’ and work only for and with those people who have money, and investigate the ‘cost of living’ for those who have money – while completely ignoring and disregarding those who have not

I forgive myself that I have accepted and allowed myself to entertain myself with prices and the trend of prices and how I can measure all this cool stuff with these complex sounding things – where I have accepted and allowed myself to ‘get lost’ in the gigantic mess which is our economic system, where I will go and entertain myself with puzzles and intricate made up networks by economists – which in no way whatsoever contribute / aid to making Earth a place that is Best for All Life

I forgive myself that I have accepted and allowed myself to be so chuffed with myself and all these sophisticate sounding little things we economists made up, where all these little points together make up the “masterwork” of ‘Economics’ – where I am so chuffed with myself and what we’ve created as this giant machine that won’t stop feeding and growing that I do not want to give up this apparent ‘masterwork’ because I’ve put so much time and effort in studying it and playing with it and getting recognition for my work/efforts/cognisance that I don’t want to give it up to create a new Economic System which is Best for All Life

I forgive myself that I have accepted and allowed myself to use methods of working with numbers which blur the extent of inequality within the world through using ‘averages’ – which is no way whatsoever reflects the true distribution of wealth and thus wellness within reality – as averages make things appear “better” than what they really are

I forgive myself that I have accepted and allowed myself to publish numbers without explaining where the numbers came from or how they were calculated – because if I did the true nature of our reality would be revealed in the numbers and people would start questioning the system – so I rather publish numbers without any explanation so that people will accept the numbers and create an idea about reality which is inaccurate, but comforting

I forgive myself that I have accepted and allowed myself to abuse people’s trust in ‘economists’ as apparently because we’ve studied economics “we know what we’re doing” and “we’re doing it in everyone’s best interest and if we could do it better we’d be doing it” -- where we will come up with the most elaborate justifications which sound so complex about the unacceptable state of the world that they will perplex the minds of people to the point where they just won’t question it and accept our limitations, because our faith in the system and enthusiasm must be grounded in good reason --- while it’s all just deception

Day 61: The Consumer Price Index (CPI)

The consumer price index – or short ‘CPI’, is used to measure changes in the price level of goods and services purchased by households, and is also used to measure inflation.

To measure the CPI, a study is done that investigates what the ‘average’ household (of the particular country for which the CPI is being measured) buys / spends money on in terms of goods and services. We are in essence working with an imaginary shopping basket/cart which has a whole bunch of stuff in it which is supposed to represent what a typical household spends money on.

When constructing the CPI, a few things are taken into consideration:

• Goods and services which should be in the ‘basket’
•  What weight should be assigned to each good/service (to  indicate its relative importance in the basket -- eg. Food over perfume)
• What base year is going to be used
• What formula is going to be used
• Prices have to be collected each month to calculate the value of the CPI for that month (as it gets published monthly)

For the first two points, in-depth surveys are undertaken to determine the relative weights, and the goods and services which should be included. Since this type of research is quite time-consuming, it only gets done every five years or so.

The base year reflects the year within which the initial survey/study was done to establish the CPI, and will be the year to which other CPI’s will be compared to.

Let’s look at a simplified version of the process:

In Country X consumers only purchase water and bread, where the ‘average’ consumer will purchase 10 bottles of water and 5 loaves of bread in a given period of time(“years”). Next we look at the prices for these items within each time period.

Year	Price of water	Price of bread
2005	$1	$3
2006	$2	$4
2007	$3	$5

Now we calculate each basket’s cost per time period:

2005: (10 x $1) + (5 x $3) = $25
2006: (10 x $2) + (5 x $4) = $40
2007: (10 x $3) + (5 x $5) = $55

Next we pick a base year, and calculate the CPI – we’ll use 2005 as our base year.
The CPI for 2005 is ($25/$25) x 100 = 100              (cost now/cost base year) x 100
The CPI for 2006 is ($40/$25) x 100 = 160
The CPI for 2007 is ($55/$25) x 100 = 220

To see how much prices increased from time period to time period – we simply subtract a 100 (= base year index) from the comparison year. So if we are using 2007 as our comparison year, we can conclude that the prices increased 120% from 2005 to 2007.

Different CPI’s will be measured for different expenditure groups such as: pensioners, urban wage earners, different provincial/metropolitan areas etc.

Since food, energy, housing and mortgage rates will usually take up quite a bit of ‘weight’ within the ‘basket’ – changes in the prices concerning these will have the biggest impact on changes in CPI.

The CPI gives a good indication in terms of increasing prices, but you can’t use it to measure the cost of living, since the CPI works with a ‘fixed basket’ – while the cost of living will change as people will substitute items for one another as prices move higher / lower (so for instance, if coffee becomes more expensive and tea cheaper, people will start substituting coffee with tea, and so try and maintain the same expenditure level, rather than just going with a ‘fixed basket’ and being non-responsive to price changes). The CPI also does not take into account the introduction of new items. If for instance internet was just introduced in the year 2006 in Country X, it would not yet be included in the CPI for the next couple of years until a new basket survey is done, and so internet prices would not be accounted for until the new survey is done. Another point which is not covered is that of quality. If bread became more nutritious but cost the same, the cost of living would remain the same while living standards would go up.

There's not much to this point, it's just one of those things we've made up to 'measure' and 'evaluate' our economy' while in no way whatsoever measuring anything real, since our economy is all about infinite growth. 

Since we're living in a world of major inequality, the CPI will also in most cased not really be representative -- as with any 'average', you're just drawing the two polarities together (extremely rich and extremely poor) and so you're not really working with anything which really represents the 'cost of living' within this world, since the majority of people are not living an average life -- but a life of misery. This 'misery' is easy to hide away in averages as the abundance of the rich will quickly "balance" this misery out in numbers. When looking at for instance per capita income, you are also working with averages. So if you have ten people in a group, and 9 out of ten earn $1000 per year and one of the ten makes $100 000 (eg small wealth elite scenario) -- you get a per capita income of $10 900, which is the 'average', but completely not representative. And so with any model in economy where one work with 'averages' you're always working with a misleading picture which will always portray things to be better for the "average person" than what they really are.